UBS Rogue Trader Accused of Losing $2 Billion

Rogue or genius? UBS incident lends fire to arguments for more bank regulation.

September 15, 2011, 11:21 AM

Sept. 15, 2011 — -- A securities trader was arrested this morning by London police in connection with $2 billion in rogue trades at Swiss bank UBS.

Kweku Adoboli, 31, was arrested at 3:30AM this morning on suspicion of fraud and is in police custody, according to the British newswires of the Press Association.

UBS, Switzerland's biggest bank, released a statement, saying it discovered a loss due to "unauthorized trading by a trader in its Investment Bank." The Zurich-based bank employs 65,000 staff around the world.

"The matter is still being investigated, but UBS's current estimate of the loss on the trades is in the range of USD 2 billion. It is possible that this could lead UBS to report a loss for the third quarter of 2011. No client positions were affected," according to the statement.

"As long as there are investment banks there will be rogue traders," Erin Davis, senior stock analyst with Morningstar, told ABC News. "Banks try to implement adequate risk controls but it's nearly impossible. Plus there's a lot of incentive to look the other way when the rogue traders are doing well. Traders only become 'rogue' when they lose money; until then, they're geniuses."

According to his LinkedIn profile, Adoboli, a graduate at the University of Nottingham, works as a director in European equity trading and was previously a trade support analyst at UBS.

According to Nottingham University, he graduated in 2003 with a degree in E-commerce and digital business, according to the Associated Press.

Adoboli may have worked with a product called an Exchange Traded Funds (ETF), which includes stocks, bonds or commodities, according to the Press Association.

Adoboli started working for UBS as a trainee investment adviser in March 2006 and has had no disciplinary action taken against him previously, according to the Financial Services Authority register of advisors, as reported by the Press Association.

Davis said it seems the trader worked in the back office until he was promoted to the trading floor, which points to below average risk controls at UBS.

"A lot of banks won't allow that kind of promotion explicitly to avoid creating this kind of opportunity. It appears that the trader, because of his back office experience, was able to by-pass the risk management systems," she said.

This is not the most serious trading loss for a bank, but it is likely to harm UBS' reputation, according Davis. Davis said the financial loss will have a marginal impact on the company's value, and it will likely be able to absorb the loss without resorting to raising capital or other "painful" measures.

But she is concerned about the impact this will have on UBS' reputation.

"I think this is pretty serious for UBS. It has been struggling to rebuild its reputation as a competent risk manager after losing tens of billions on U.S. subprime, and this will clearly damage its already weak brand," Davis said. "We'd be surprised not to see net asset outflows from its private bank as a result."

Davis said the incident provides more firing power to those who want to increase bank regulation in Switzerland.

"I think this generally lends credence to the argument that investment bank funding should be explicitly separated from deposit funding," she said. "If regulation goes further in this direction, it would both reduce the risk of tax payer bailouts and somewhat reduce the availability of corporate loans."

During the financial crisis, UBS lost nearly 30 billion Swiss francs, or $34.5 billion, and had to be bailed out due to its investments in low-quality assets, especially U.S. subprime mortgages, Davis wrote. She said UBS' private bank is its "crown jewel," and its main challenge in recent years has been to regain its clients' trust. But Davis said it has had only "moderate success." The bank's net new asset inflows, while now positive, are weak relative to its competitors.

Other banks have recovered from major trading losses. In January 2008, French bank Societe Generale said it lost about $6.7 billion after a trader in Paris, Jerome Kerviel, took unauthorized positions on European stock index futures. That led to tens of billions of pounds in losses on the London Stock Exchange.

Kerviel was sentenced to three years in prison for forgery, breach of trust and unauthorized use of company computers, but his conviction is under appeal. He wrote a book in French called, Downward spiral: Memoirs of a Trader, published in May 2010, explaining that his superiors turned a blind eye to illegal trading practices which were widespread.

Philip Octave said he was Adoboli's landlord when he lived in Brune Street, Shoreditch, a comfortable neighborhood in London, until he moved out four months ago, according to the Press Association. Octave said he asked Adoboli to move out of the apartment so he could renovate it.

Octave said Adoboli had rented a groundfloor flat a few blocks from the UBS office for about $6,320 a month, according to the AP.

"He was a very nice guy, very polite. He would speak to anybody. I haven't got a bad word to say about him," Octave told the Press Association. "I wouldn't say he was the tidiest person but he was a good tenant.

"He was very well spoken and dressed very smartly. I can't believe that it (the rogue trader) is him," Octave said.

Octave said he was he was behind in the rent about twice, but he always made the payments eventually.

He said Adoboli was of African descent without relatives in the UK and visited Africa every now and then to see his parents.

"He was a very quiet chap actually. I would not say that he was a party animal," he said according to the Press Association.

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